2 Cost Engineering
2 Cost Engineering
2 Cost Engineering
Prepared by
OCTOBER 2010
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COST ENGINEERING
Target Audience
- Industries
- Construction Engineers
- Valuers
- Project managers
- Procurement officers
- Engineering planners
- Plan implementers
- Performance Assessors
- Administrators
Learning Outcomes
Upon satisfactory completion of the course, participants should be able to understand
and apply several major areas of knowledge and skills in Cost Engineering
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COURSE CONTENT
INTRODUCTION
• What Is Engineering?
• What Is Cost Engineering?
WHO IS A COST ENGINEER
• The fundamental tasks
WHAT IS FINANCIAL MANAGEMENT?
• Why Cost Engineering is Important
THE INTERNATIONAL COST ENGINEERING COUNCIL (ICEC)
• The Institute of Appraisal and Cost Engineers (IA&CE) Nigeria
• Major objectives of ICEC
• International Network
• Key Functions of Cost Engineers
SCOPE
Part I Supporting Skills and Knowledge
Part II Cost Estimating and Cost Control
Part III Planning and Scheduling and Project Management
Part IV Economic Analysis and Business Planning
THE DIVERSE WORKS OF COST ENGINEERS
CE Information
COST PLAN
• Scheduling
• Risk Assessment
TIME VALUE OF MONEY
• Equivalence
COST INDEXES
ESTIMATING VERSUS BIDDING
Estimating
Bid process
Competitiveness
DUTIES AND RESPONSIBILITIES OF THE ESTIMATOR
ESTIMATING AND BID PROCESS
DIRECT JOB EXPENSES
ACCURACY
COST CONTROL
LIFE CYCLE COSTING
Checklist for Life Cycle Costing
DIRECT AND INDIRECT COSTS
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1.2 INTRODUCTION
Engineering is a wealth creating profession. It is the art and science of harnessing scientific
knowledge for the benefit of mankind. The 21st century engineering is at the cutting edge of
modern technology, therefore for cost effectiveness cost competitiveness, the engineer
must practice and optimize the science and art of comparing and contrasting for full
realization of the best option(s) at all times.
The purpose of cost engineering is to determine standard cost for execution of works,
quotations, cost control, cost assessment and cost management. Cost must be calculated
based on the engineering facts by account. Allocation and distribution in most cases are
not valid. Sound mathematics and correct procedures are necessary for developing cost
estimating systems, however it is more important for cost engineers and users of cost
information to understand how costs are developed.
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specific circumstances of the activity and the information available. In most instances, the
output of a cost engineering exercise is not an end in itself but rather an input to a decision
making process.
Simply put:
Financial management is the art and science of money management. Financial management is
important at all levels of human existence because every entity needs to look after its
finances.
• In establishing budgets
• In conducting cost/technical trade-offs
• In the submission and evaluation of price proposals
• In preparing for contract negotiations and
• In assessing the cost impact of introducing changes to
existing designs.
ICEC member societies are located in more than 40 countries and have chapters or
sections in many additional countries.
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4.3 THE INSTITUTE OF APPRASIAL AND COST ENGINEERS (IA&CE) NIGERIA
The Institute of Appraisers and Cost Engineers (IA&CE) a division of the Nigerian
Society of Engineers is member institute of the International Cost Engineering Council
(ICEC). The IA&CE is dedicated to 21st Century Total Cost Engineering Management.
• To analyze investment and development for the guidance of owners, financiers and
contractors.
• Estimates of capital or assets costs including development costs
• Estimates of operating and manufacturing costs through an asset’s life cycle
• Risk assessment and analysis
• Trending of scope and cost changes
• Decision analysis
• Financial analysis (e.g net present value, rate of rate of return etc)
• Project cost Control
• Appraisals of existing assets
• Project analyses, databases, and benchmarking
• Planning and Scheduling
• Sitting studies etc.
• Productive and investment needs assessment
• Facility management needs assessment
• Project feasibility and budget assessment
• Cost management
• Procurement management
• Contract administration
• Whole-life appraisals;
• Quality audits
• Value management and
• Dispute resolution
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5.2 SCOPE
In its broadest sense cost engineering is that area of engineering principles where
engineering judgment and experience are utilized in the application of scientific
principles and techniques to problems of cost estimating cost control profitability
analysis, project management, and planning and scheduling. In addition, cost
engineering embraces the principles of several disciplines and branches into business
planning, management science, optimization, operations research, accounting, and
economics, among others. Cost engineering covers a wide range of topics as listed in
component topics in cost engineering.
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5.7 THE DIVERSE WORKS OF COST ENGINEERS INCLUDE:
• Cost Estimating
• Cost Control
• Cost Planning
• Conceptual Studies
• Value Engineering
• Constructability Studies
• Project Cash Flow Projection
• Independent Check Estimates
• Liquidated Damages Assessment
• Project Cost Variation
• Project Cost Fluctuation
• Negotiation Support
• Review of Contract time extension request
• Claims Management/Avoidance
• Construction Management
• Project Management
• Customs Destination Inspection
• Insurance Assessors/Loss Adjusters
• Project Scheduling
• Risk Analysis/Management
• Life Cycle Cost Analysis
• Value Analysis/Management
• Planning/Budget Estimates
• Profitability Analysis of Engineering Project and Process
Monitoring of the cost plan enables the Cost Engineer to detect at any time during the
project if the budget is exceeded or to take immediate remedial action before planning
and design process proceeds further.
At each phase of the project, the cost plan is updated and the design managed so that the
budget is not exceeded. Cost plan also provides basis for comparison of alternative
designs/options. A properly prepared/monitored cost plan gives the project Stakeholders
confidence that it is “on the right track” in respect of costs.
5.10 SCHEDULING
Scheduling is an essential part of successful cost engineering management from start to
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completion of projects. Attention to details is important in scheduling to ensure that as
far as reasonably practicable that careful consideration is given to constraints as site,
climate and manpower. A properly prepared schedule must reflect the project parameters.
6.3 EQUIVALENCE
Different sums of money that have equal value over an interest period are said to
equivalent. That is, a principal and principal-plus-interest are equivalent.
C2 = C1 Index 2
Index 1 ………………………… (1)
Where C1 = Initial Cost in first year
C2 = Future Cost in future year
Index1 = Index in first year
Index2 = Index in further year
Example 1 A project built in 1986 at a cost of N800m. the index for this project in 1986
was 238. What would the project cost in 1989 if the index in 1989 is 320?
320
800 𝑥 = 𝑁1,076𝑚 = 𝑁1.076
238
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component is called the estimate, which determines the cost of the job. The second
component is the bid, which determines the job’s selling price. It is critical that you
understand the difference between an estimated cost and a bid price. Estimating is
determining your cost and bidding is determining the selling price.
8.2 ESTIMATING
The purpose of estimating is to determine the cost of a project before you actually do the
work. Estimating must take into consideration variable job conditions, the cost of
materials, labor cost, direct job expenses, and management costs (overhead).
8.4 COMPETITIVENESS
Control overhead expenses to keep them to a minimum. Factors that affect a contractor’s
competitiveness include:
1. Competition
2. Cost of material (buying power)
3. Experience
4. Labor cost and productivity
5. Management skills
6. Overhead
7. Selling the job at your price
The estimator must develop a system to insure that the bid is accurate, and verify that
errors in the estimate have not been made.
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Computer applications in estimation like Microsoft Excel can be included
1. As-built plans
2. Business and occupational fees (B&O)
3. Engineering/working drawings
4. Equipment rental
5. Field office
6. Fire seals
7. Guarantee
8. Insurance
9. Miscellaneous material items
10. Mobilization
11 HSE compliance
12. Out of town expenses
13. Parking fees
14. Permits and inspection fees
15. Public safety
16. Recycling fees
17. Storage/storage handling
18. Sub-contract expenses
19. Supervision cost
20. Temporary wiring
21. Testing and certification fees
22. Trash disposal
23. Unity charges and fees
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o Not transferring totals to the summary worksheet properly.
o Omitting a section of the estimate
o Thinking that typical floors 6-12 is six flows when it’s seven floors
o Using improper estimating forms
o Using supplier take-off quantities for quotes
o Relying on verbal supplier quotes
o Wrong extensions or totals
o Wrong scale on reduced blueprints
o Wrong unit for labor –unit
o Wrong unit for material cost
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15.1 DIRECT AND INDIRECT COSTS
COST ESTIMATE
PROFIT CONTINGENCY
15.2 DIRECT COSTS are the costs of all permanent equipment, materials, labor and
other resources involved in the fabrication, erection, and installation of the
permanent facilities.
15.3 INDIRECT COSTS are all costs other than direct costs which do not become a
permanent part of the facilities but are required for the orderly completion of
the project. These may include, but are not limited to, construction management,
start-up costs, fees, insurance, and taxes.
REFERENCES
st th
1. ACostE (1994) Cost Management for the 21 Century – 13
International Cost Engineering Congress
2. Michael Holt (1997) Electrical Estimating
3. Mbelede C (2003) Cost Engineering Practice: Nigeria as a Case
Study Presented/published at the Nigeria Society of Engineers
Annual General Meeting (LAGELU 2003) Ibadan
4. Mbelede C (2005) Basic Engineering Economics. Compulsory Refresher
Course for Prospective Corporate Members of the Nigerian
Society of Engineers.
st
5. Mbelede C (2010) Cost Engineering Practice in 21 Century Nigeria – The
Appraise and Cost Engineer Journal of the Institute of Appraises
and Cost Engineers (IACE)
6. ICEC - The International Cost Engineering Council www.coste.org
7. Jelen’s Cost and Optimization Engineering Third Edition by Kenneth K.
Humphreys, PE CEE (ED) American Association of Cost Engineers
NOTE
Instructors must be people that are practically involved
This must be made interactive with pictures, video clips, figures, charts etc where applicable
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